From the TUC

Terrible inflation figures increase the gloom

22 Mar 2011, by in Economics

Today’s inflation figures were even worse than expected. Using the Retail Price Index measure of inflation (which unions prefer, because it reflects how workers actually spend their money) prices in February 2011 were 5.5 per cent higher than they were in February 2010; this was worse than the situation in January, when the annual inflation rate was 5.1 per cent and it is the worst since July 1991.

The government would prefer everyone to use the Consumer Price Index measure of inflation, which tends to produce a lower figure, but the CPI results were disappointing too. Using this measure, the annual inflation rate was 4.4 per cent, up from 4.0 per cent last month. Although many forecasters had predicted that inflation would rise, the consensus had been for around 4.2 per cent, and the actual results took many people by surprise.

This is bad news for working people, but there is even worse in the detail of the inflation figures. The RPI and CPI are averages for a ‘basket’ of different goods and services and if you look at the different categories, there are some very high increases. The RPI annual rate for food was 6.4 per cent, and the CPI rate was 6.2 per cent. Transport costs in the CPI showed a 7.9 per cent increase. One way of coping with big price increases is to cut back on non-essentials, but this is a much less effective response when essentials like food rise even faster than the overall average.

What makes this even harder to cope with is the fact that prices are rising about twice as fast as average earnings – the annual rate for the 12 months to Nov/Jan was 2.2 or 2.3 per cent (depending on whether or not you include bonuses). The government’s pay freeze makes this situation even worse for public sector workers, of course.

Things will become even harder if these figures lead the Monetary Policy Committee to increase interest rates in May. Already, City commentators are insisting on this, but it would be a double whammy for workers. This would feed through to mortgages and other loans, increasing outgoings, and it would further dampen demand, threatening jobs and making it even less likely that workers will get decent pay increases.